As next week’s Autumn Statement fast approaches, the siren calls for the Chancellor to “do something” to revive growth are growing louder. Yet George Osborne must resist the 10-point plans and shopping lists of eye-catching initiatives that promise instant economic alleviation and instead hold his nerve in the face of weaker-than-expected growth.
As Reform’s new report, The long game, argues, the economic recovery was always going to be difficult. All of the evidence shows that fiscal crises originating from financial crises are protracted and severe. The levels of debt in the economy prior to the recession had reached unsustainable proportions, with total gross debt rising from 322% of GDP in 2000 to 543% of GDP in 2009.
This leveraging was not just driven by financial services or government; households too increased their debt to income ratio from 112% in 2000 to 169% in 2008. Government, industry and public must all, therefore, go through a painful but necessary period of deleveraging and low growth. Even without market uncertainty and sovereign debt crises, the programme of austerity was always a 10-year project, with the first Parliamentary term reducing the deficit, and the second consolidating the gains.
Furthermore, history has shown that tinkering around the edges, no matter how well intentioned, can actually make things worse. Gordon Brown’s time in the Treasury demonstrated that micro changes to tax and regulation actually undermine investor confidence and damage productivity.
This is especially true of proposals to target policies to support small and medium-sized enterprises (SMEs). Firstly, the evidence shows that SMEs, despite comprising 99.9 per cent of enterprises in the UK, contribute 58% of employment, less than 49% of turnover and just 14% of tax revenue to the Exchequer. By contrast, the largest 100 firms in the UK contribute around 12% of tax revenue.
Secondly, attempts to incentivise enterprise and small business growth, such as the Government’s moratorium on regulation for micro and start-up businesses, can create perverse consequences such as incentivising larger firms to become smaller and preserving inefficient small businesses that contribute little to the general economy. The same is true of Vince Cable’s announcement of small firms’ exemption from employment regulation, which should be extended to all businesses. Business policy should not be targeted according to firm size, but aim to improve the environment for all firms.
The proposal to bring forward infrastructure spending to create jobs is equally flawed. The days of building infrastructure with high volumes of manpower with picks and shovels are long gone. Modern infrastructure projects, including green infrastructure, are capital intensive and largely employ skilled labour. As such, they are therefore unlikely to provide immediate respite for the one million currently unemployed, as many claim, and are equally unlikely to be situated where jobs are needed most.
Furthermore, as is the case with the Government’s launch of the Get Britain Building Fund on Monday, shifting forward infrastructure spending also increases the risk of the wrong project being pursued. The Government’s plans to underwrite mortgages and accelerate stalled projects risks repeating mistakes over sub-prime loans and developments that nobody wants.
Next Tuesday, the Chancellor’s greatest currency is consistency. The Government’s steadfast position of Plan A is right. It is also reasonable. For the two years which allow comparison, 2011 and 2012, the UK’s forecast contraction is 2.2% of GDP, compared to 2.4% in the Eurozone as a whole.
Yet inconsistencies in the Government’s economic policies are holding back growth. The Government’s ambition to make the UK “open for business”, for instance, is being undermined by restrictions on skilled migration and the Government’s equivocation on supply-side reforms to health and safety and employment law. Efforts to encourage bank lending to businesses are contradictory to simultaneous calls for banks to shore up their balance sheets and minimise risk within the system. The list goes on.
If the Chancellor holds his nerve in the face of economic headwinds and delivers on consistency then business confidence growth will return in the medium term. The Autumn Statement must recognise that quarterly growth reports should not guide economic policy, and that what really matters for growth is the underlying potential of the economy. The Chancellor must play the long game if he is to create a stronger and fairer economy in the future.
* Will Tanner is a Researcher at the independent think tank Reform. Reform’s new report, The long game: Increasing UK economic growth can be downloaded at www.reform.co.uk.
Follow @libdemvoice.org on Bluesky
Like us on Facebook
Subscribe to our feed
Sign-up for our daily email digest
Northern Ireland debates the future of its railways in 1957
Church Green video
Thinking of standing for election or re-election next year? Helpful questions to consider
Endometriosis and acetylation
Jeff
Nonconformistradical
John Peters
David Raw
Henry
9 Comments
By what criterian then should we judge the success or otherwise of the economic policy?
The quartely growth figures are a good indicator of how much revenue is going to the exechequer which he needs to pay off the sovereign debt. The fact that the supposedly independent OBR makes forecasts on these figures – and then frequently downgrades them is a useful indicator that the policy is not working.
@Geoffrey
“By what criterian then should we judge the success or otherwise of the economic policy?”
How about by the Government’s ability to borrow money at low interest rates? which means that the government pays less for years to come in interest charges, meaning more money for public services /lower taxes and individuals have more money as they are paying less for mortages and other borrowings?
wow – epic fail
@Simon – how about we acknowledge that record low bond yields are as much an expression of a flight to safety and risk-averse behaviour from investors uncertain about growth as it is about government finances? bond yields this low aren’t necessarily a good thing – and if they are, why not make use of these low rates and borrow in the short term to bring about capital investment which would provide a real boost to long-term growth? not saying that’s necesarily what I’d do, but you have to ask whether the 2.6m out of work (comprising 1m under 24) give a royal hoot about what 10-yr govt treasuries are rated as when they have no prospects of participating in the economy in the coming years.
OK Mr. Tanner, how about we re-visit this post a year from now, and then every year, and see where we’ve got to. If you’re right, a period of initial deleveraging will lead to stronger growth and more jobs – if you’re wrong, I’d go out and buy canned goods cos it’s about to get messy…
Prateek,
You beat me to it! Record low bond yields in Britain are all about flight to safety and not about confidence in Osborne’s stewardship.
Government, industry and public must all, therefore, go through a painful but necessary period of deleveraging and low growth
The difficulty is is won’t work; it’s mathematically impossible.
While individuals can save more and/or spend less in a crisis to assume that the same is true of the nation as a whole is a fallacy of composition. It’s just not possible for everyone in the country to spend less than their income at the same time since one person’s spending is another’s income. They must sum to zero. The only escape from this hard truth is if there are huge export earnings. In fact we have net imports which makes the situation even worse.
Something somewhere has to give. If Osborne persists that’s likely to be company profits as Martin Wolf pointed out in yesterday’s FT.
http://www.ft.com/cms/s/0/448bb4e0-15f2-11e1-a691-00144feabdc0.html#axzz1eiXk65XC
As Prateek say, it’s about to get messy.
@Prateek and Liberal Eye
“how about we acknowledge that record low bond yields are as much an expression of a flight to safety and risk-averse behaviour from investors uncertain about growth as it is about government finances?”
Indeed they may be a flight to safety – because the markets have confidence in the Coalitions control of public spending. Which would not last if we started borrowing (even more) money.
“but you have to ask whether the 2.6m out of work (comprising 1m under 24) give a royal hoot about what 10-yr govt treasuries are rated as when they have no prospects of participating in the economy in the coming years.”
They should be concerned that if interest rates rise they will have even less chance of getting a job.
Ironic really that you think we should borrow more money on he day when the Italian Government is paying 6.5% to borrow for 6 months – up from 3.5% a month ago.
@Simon: “the markets have confidence in the Coalitions control of public spending. ”
Simon, I sometimes think that you and George Osborne are the only 2 people left in the UK who still believe that the coalition’s economic policy is working! Even the OECD is now hinting (according to the Telegraph this morning) that the government needs a Plan B up its sleeve.
Even if you support spending cuts in general, the impact of those spending cuts is falling much more harshly on already struggling areas. There’s been ample studies showing that councils in the North of England are being hit much more strongly than (largely Tory) councils in the south. Far from “re-balancing” the economy, it is being tilted even further towards the South-East.
Simon,
Indeed they may be a flight to safety – because the markets have confidence in the Coalitions control of public spending.
This may indeed be partly the case, “the markets” can have multiple reasons for doing something but despite libertarian rhetoric about their God-like powers they actually have feet of clay like the rest of us; they actions often betray very shallow insights and/or very short term concerns. So the markets may be driven by the opportunity to take a profit over days or even seconds rather than the long term that government must consider.
The fact remains that the govt’s plan is mathematically impossible.
You can, of course, be consistently wrong.
So, if I can summarise this article: don’t do anything at all and don’t have any new thoughts, because it’s dangerous.